Determinants of successful immigrant entrepreneurship in the Federal Republic of Germany

Determinants of Successful Immigrant Entrepreneurship in the Federal Republic of Germany

Inaugural-Dissertation zur Erlangung des Doktorgrades der Wirtschaftswissenschaftlichen Fakultät

der Eberhard-Karls-Universität Tübingen

vorgelegt von

Nikolinka Fertala aus Razgrad

2006

Dekan: Professor Dr. pub. oec. Jörg Baten Erstberichterstatter: Professor Dr. pub. oec. Jörg Baten Zweitberichterstatter: Professor Dr. rer. pol. Kerstin Pull Tag der Disputation: 11. November, 2005

Nikolinka Fertala

Determinants of Successful Immigrant Entrepreneurship in the Federal Republic of Germany

“The entrepreneur is at the same time one of the most intriguing and one of the most elusive characters … in economic analysis. He has long been recognised as the apex of the hierarchy that determines the behaviour of the firm and thereby bears a heavy responsibility for the vitality of the free enterprise society.”

W. J. Baumol (1968: 64)

Acknowledgements

During my research years in Tübingen, I received generous assistance from many people and institutions all over the world. I am particularly grateful to my supervisor Professor Jörg Baten for his persistent support during the days of obscurity and suffering, which are the inseparable companions of each and every PhD scholar. Even more importantly, he encouraged me as well to apply for and attend several international conferences, and to present my research there. I wish to thank Professor Werner Neus for his valuable comments, critical questions, and his active role in the discussion when I presented my working papers in the colloquium organised by the graduate school in Tübingen.

My dissertation project is based on five working papers, which contribute to one single story; namely, what are the factors driving immigrants in Germany to establish their own businesses, and on the other hand which are the crucial determinants leading to entrepreneurial success. All five papers were presented at international conferences, thus I wish to express my gratitude for the various comments I received. I am much indebted to Professor Leo Dana who agreed to publish my study entitled ‘Do human and social capital investments influence survival? A study of immigrant entrepreneurship in Upper Bavaria’ as invited paper in the International Journal of Entrepreneurship and Small Business. He even gave me the freedom to write a chapter in the edited book Ethnic Minorities in Entrepreneurship, London, Edward Elgar, which I entitled ‘Immigrant entrepreneurship in Germany: Working on the fringes or deliberate self-decision’. While corresponding with him, I mentioned my study on homophily and economic performance of immigrant entrepreneurs, thus he became fascinated and approved to publication the paper entitled ‘Do birds of a feather flock together and perform economically better? A study of homophily paradox among immigrant entrepreneurs in Germany’.

My first paper ‘Immigrant’s propensity to self-employment in Germany” was presented at the 3^rd International Conference ‘Entrepreneurship, Employment, and Beyond’ in Krakow 2003. Thus, I wish to thank Professor Jan Targalski and Professor Karl Gratzer for the challenging debates and excellent comments. My paper ‘Do human and social capital investments influence survival? A study of immigrant entrepreneurship in Upper Bavaria’ was presented at the 24^th Babson Kaufmann Entrepreneurship Research Conference, the most world-wide recognised conference in

the field of entrepreneurship research, which took place in Glasgow 2004. I owe special thanks to Professor Teresa Menzies and Professor Howard E. Aldrich who contributed remarkably to the quality and intensity of the discussion. This paper was also presented at the 2^nd Interdisciplinary European Conference on Entrepreneurship Research in Regensburg 2004. Thus, I wish to thank Professor Michael Dowling who organised the conference for his active role in the discussions. My paper ‘Do birds of a feather flock together and perform economically better? A study of homophily paradox among immigrant entrepreneurs in Germany’ was presented at the 25^th Babson Kaufmann Entrepreneurship Research Conference, which was held in Boston, the US, 2005, special anniversary year, and at the 2^nd AGSE International Entrepreneurship Research Exchange in Melbourne, Australia, 2005. I highly appreciated the opportunity to present my research there.

Furthermore, the scholarship from the German Research Foundation (DFG) supported my research objectives noticeably and helped me considerably to mitigate the financial burden imposed by attending international conferences and workshops. The encouraging atmosphere in the graduate school and in the research group at the department of economic history facilitated my work progress tremendously. Therefore, I wish to thank all members of the graduate school and our research group for their persistent support, especially for the excellent advice of Dominique Adey Balinova concerning language and style as well as for close friendship.

My greatest debt is to my husband Walter Fertala and my mother Argira for their warmth and mental support during my research years in Tübingen. This thesis would not have been feasible without their generosity and understanding for my not being at home in Vienna.

Preface

Before I begin with the serious research issues, I wish to emphasise several basic considerations regarding entrepreneurship as a subject matter, cited literature, language and inherent problems while employing empirical methods to data sets. I do strongly believe in these considerations, and thus I am fully convinced of the fact that they do contribute to the quality of research.

Entrepreneurship is a subject that is commonly taught and researched in business schools, but seldom if at all in economics departments. Consequently, most studies on entrepreneurship tend to be written from a business or management perspective. Such research often downplays, or ignores altogether, the contribution of modern economics to our understanding of the subject. Indeed, it is common to find references to ‘the contribution of economics’ mainly in terms of the treatises of Frank Knight (1921) and Josef Schumpeter (1934). It is unclear to me why entrepreneurship plays such a marginal role in most economics departments. It is possible that economists are suspicious of a subject with an avowedly mongrel provenance, which reflects a multiplicity of different, and often non-quantitative, perspectives. From a personal standpoint, the multidisciplinary nature of entrepreneurship posed one of the greatest challenges in writing this dissertation. It also offered me some of the greatest rewards.

My own view is that the multidisciplinary nature of entrepreneurship is a potential strength, rather than a weakness. But this potential will be achieved only if we, students and researchers, take the trouble of breaking the boundaries of narrow scholarship, an ideal to which my dissertation is dedicated.

Given the multidisciplinary nature of entrepreneurship, fortunately, it is a broad field of research that creates piles of literature every year; thus, I restricted myself to essential contributions published in peer-reviewed journals and outstanding edited volumes. My research also includes topics from econometrics, sociology, and psychology, which increase additionally the quantity of related literature available.

Consequently, I cite only important sources that are of significant relevance to my research. In general, I concentrate on the ‘working paper style’, which avoids long- winded reviews of literature. Conversely, my data sets, methods and results are of main interest.

Moreover, the primary objective of each and every scientific work is to maintain readability. Studying the book written by Woodward (1997) helped me to approach this

objective more swiftly. To avoid roundabout sentence constructions, which in turn sound more impressive, Woodward (1997) suggested the active voice in the common use. ‘I’ and ‘We’ as well as ‘He’ and ‘She’ are alternately chosen in my dissertation.

Finally, empirical researchers wish repeatedly to produce significant results, and generally only these results are published. Do we not run, therefore, into the troubles of publication selectivity bias? However, I strongly believe that stating the limitations of data sets and methods employed is an essential part of each empirical research.

T

C

1. INTRODUCTION _____________________________________________ 1 1.1 Relevance of the subject immigrant entrepreneurship _________________ 1 1.2 Objective of the thesis ___________________________________________ 2 1.3 Positioning in the scientific field ___________________________________ 5 1.4 A definition of successful entrepreneurship and measurement issues ____ 6 1.4.1 Who is an immigrant entrepreneur? ______________________________ 7 1.4.2 How should we measure entrepreneurial success?___________________ 8 1.5 The structure of the thesis ________________________________________ 9

2. IMMIGRATION TO GERMANY AND LABOUR MARKET ____________ 11 2.1 Extended abstract ______________________________________________ 11 2.2 Introduction __________________________________________________ 11 2.3 Managing migration in Germany: historical background _____________ 12 2.3.1 From emigration to guest workers’ recruitment ____________________ 12 2.3.2 Ethnic Germans and asylum: 1989-2000 _________________________ 15 2.3.3 New guest workers and green cards _____________________________ 17 2.4 Labour market participation of immigrants to Germany _____________ 19 2.4.1 Trends among the immigrant population since 1960 ________________ 19 2.4.2 Employments issues: A brief overview __________________________ 24 2.5 Self-employment activities of immigrants to Germany________________ 28 2.5.1 General legal conditions for immigrant’s self-employment___________ 28 2.5.2 Distribution of self-employed immigrants by nationality ____________ 30 2.5.3 Distribution of start-ups: A comparative overview _________________ 32 2.6 Conclusion ____________________________________________________ 40 3. WILLINGNESS TO START AS AN IMMIGRANT ENTREPRENEUR ____ 42 3.1 Extended abstract ______________________________________________ 42 3.2 Introduction __________________________________________________ 42 3.2.1 Former studies on the propensity to entrepreneurship _______________ 42 3.2.2 What makes my analysis special? ______________________________ 45 3.2.3 Models with qualitative dependent variables: A methodological review_ 46

3.3 Data and hypotheses under estimation_____________________________ 50 3.3.1 The German socio-economic panel as a data source ________________ 50 3.3.2 Construction of explanatory variables and working hypotheses _______ 51 3.3.3 Characteristics of the sample populations ________________________ 58 3.4 Predicting immigrants’ propensity to be an entrepreneur_____________ 61 3.4.1 The self-employment decision _________________________________ 61 3.4.2 Empirical results of the entrepreneurial decision ___________________ 63 3.4.3 What has changed during the period 1984-2000? __________________ 68 3.5 Conclusion ____________________________________________________ 69

4. THE IMPACT OF HUMAN AND SOCIAL CAPITAL INVESTMENTS ON SURVIVAL IN UPPER BAVARIA _________________________________ 72 4.1 Extended abstract ______________________________________________ 72 4.2 Introduction __________________________________________________ 72 4.3 Determinants of survival in immigrant entrepreneurship _____________ 75 4.3.1 Human capital hypothesis_____________________________________ 76 4.3.2 Social capital hypothesis _____________________________________ 78 4.3.3 Specificity of investment in human capital _______________________ 79 4.3.4 Immigrant and native entrepreneurs _____________________________ 80 4.4 Patterns of survival performance in Upper Bavaria__________________ 81 4.4.1 Data set employed in the survival analysis________________________ 81 4.4.2 Dimension and likelihood of survival by immigrant’s nationality______ 82 4.4.3 Regional location ___________________________________________ 87 4.4.4 Industrial sectors____________________________________________ 89 4.4.5 Causes for liquidation________________________________________ 92 4.4.6 Individual characteristics of the immigrant entrepreneur_____________ 93 4.5 Models for duration data ________________________________________ 96 4.5.1 Theoretical background: A brief overview________________________ 96 4.5.2 Parametric models of the hazard rate ____________________________ 98 4.5.3 Why should I choose the Gompertz-Makeham model? _____________ 101 4.5.4 Where should I attach the covariates? __________________________ 104 4.6 Empirical results______________________________________________ 108 4.6.1 Results for the human capital endowment _______________________ 108 4.6.2 Results for the social capital endowment ________________________ 119 4.6.3 Differences in survival among the immigrant entrepreneurs _________ 126 4.6.4 Limitation of the study on Upper Bavaria _______________________ 129 4.7 Conclusion ___________________________________________________ 129

5. A DYNAMIC MODEL OF BEHAVIOUR CHANGE: HOW FAST DO

IMMIGRANT ENTREPRENEURS ADJUST THEIR BELIEFS? _________ 132 5.1 Extended Abstract ____________________________________________ 132 5.2 Introduction _________________________________________________ 132 5.2.1 How important is behaviour change for entrepreneurial success? _____ 133 5.2.2 Former studies on the learning context in entrepreneurial ventures____ 134 5.2.3 What makes my theoretical formulation unique?__________________ 136 5.2.4 Structure of this chapter _____________________________________ 137 5.3 The theoretical model of entrepreneur’s behaviour change___________ 137 5.3.1 Specification of the theoretical model __________________________ 140 5.3.2 Theoretical robustness of the model____________________________ 144 5.3.1.1 Are there alternative interpretations of autoregressive effort? ______ 144 5.3.1.2 Incorporating observable characteristics ______________________ 146 5.4 What can we learn from belief adjusting? _________________________ 148 5.5 Conclusion ___________________________________________________ 150

6. THE IMPACT OF HOMOPHILY ON ENTREPRENEURIAL

PERFORMANCE: CASE STUDY OF HAMBURG CITY _______________ 152 6.1 Extended Abstract ____________________________________________ 152 6.2 Introduction _________________________________________________ 152 6.3 Homophily as a basic organising principle ________________________ 154 6.3.1 Studies of homophily across the twentieth century ________________ 154 6.3.2 Types of relationships among individuals _______________________ 156 6.3.3 The salient dimensions of gender and nationality _________________ 158 6.4 The impact of homophily on entrepreneurial performance ___________ 160 6.4.1 Employee – customer homophily______________________________ 161 6.4.2 Workplace homophily ______________________________________ 163 6.4.3 Entrepreneur – supplier homophily ____________________________ 163 6.5 Research design of the case study Hamburg city____________________ 164 6.5.1 Design of the random sample _________________________________ 164 6.5.2 How representative is the drawn sample? _______________________ 165 6.5.3 Patterns of immigrant entrepreneurship: descriptive analysis ________ 170 6.5.3.1 Year of enterprise establishment and age of entrepreneur _________ 170 6.5.3.2 Education and German language skills _______________________ 172 6.5.3.3 Volume of sales by country of origin and industrial sector ________ 175 6.5.3.4 Employment structure at the workplace _______________________ 178 6.5.3.5 Co-national economic relationships __________________________ 180

6.6 Empirical results for the homophily impact on the entrepreneurial

performance _______________________________________________________ 182 6.6.1 Determinants of entrepreneurial performance: construction of variables 182 6.6.2 Entrepreneur’s capital endowment and economic performance_______ 185 6.6.3 Homophily and entrepreneurial performance_____________________ 190 6.7 Limitation of the case study_____________________________________ 197 6.8 Conclusion ___________________________________________________ 197

7. CONCLUDING REMARKS ___________________________________ 199 7.1 The determinants of inclining towards entrepreneurship ____________ 200 7.2 The success of immigrant entrepreneurs to Germany _______________ 201 7.2.1 Which factors extend the survival of enterprises? _________________ 201 7.2.2 How fast do immigrant entrepreneurs adjust their beliefs? __________ 203 7.2.3 Do birds of a feather flock together and perform better? ____________ 204 7.3 Contribution of my research ____________________________________ 205

8. MATHEMATICAL AND TECHNICAL APPENDIX__________________ 207 8.1 Mathematical appendix ________________________________________ 207 8.1.1 Derivation of optimal effort and equation (5.10) __________________ 207 8.1.2 Proof of equation (5.14) _____________________________________ 208 8.2 Technical appendix____________________________________________ 211 8.2.1 Questionnaire design _______________________________________ 211 8.2.1.1 General questions with regards to the enterprise ________________ 211 8.2.1.2 The preparation of the enterprise establishment_________________ 212 8.2.1.3 The consulting prior to enterprise establishment ________________ 213 8.2.1.4 The financing of the enterprise establishment __________________ 215 8.2.1.5 The obstacles with regards to the German authority _____________ 218 8.2.1.6 The problems subsequent to the enterprise establishment _________ 218 8.2.1.7 The employment issues ___________________________________ 219 8.2.1.8 The entrepreneur’s personality and performance ________________ 219 8.2.1.9 Retrospect ________________________________________________ 221

9. REFERENCES_____________________________________________ 222 9.1 Cited literature _______________________________________________ 222 9.2 Law texts and data sources _____________________________________ 240 9.2.1 Law Texts ________________________________________________ 240 9.2.2 Data Sources ______________________________________________ 240

C

S

A

SYMBOLS , ,

a b c… Vectors of parameters

, , , , ,

α β γ δ λ υ… Vectors of parameters

( )

it, it

c c ⋅ … Cost function of entrepreneur i at time t

E… Wage/Salary employment

Ε… The expectations operator

( )

Φ ⋅ … The distribution function of the standard normal

( )

( )

f ⋅ F ⋅ … The density and distribution functions of a random variable

( )

h t0 … The baseline hazard rate at time t

i( )

h t … The hazard rate of entrepreneur i at time t

Ii… A binary observed indicator variable: equal to one if individual i is self-employed, otherwise zero

*

Ii … An unobserved binary indicator variable: the probability individual i chooses to be self-employed

Iit… Invested effort of entrepreneur i at time t

1

Iit₋… Invested effort of entrepreneur i at time t−1

I… Entrepreneur’s level of dislike working beyond certain point

L… The likelihood function

n… Number of individuals in the sample

Ωit… The information set of entrepreneur i at time t

pit… True unobserved underlying productivity of entrepreneur i at time t

ˆ_it

p … Signal of unobserved productivity of entrepreneur i at time t

πit… Observed operating profit of entrepreneur i at time t

S… Self-Employment as occupational choice

σ2… Variance of a stochastic regression disturbance term θit… Marginal operation costs of entrepreneur i at time t

t… Time

T… The number of time periods

( )

U ⋅ … A cardinal utility function

,

u… Stochastic regression disturbance term , ,

W X Z… Vectors of observable characteristics

INDEXES

i… Subscript indexes an individual

j… Subscript indexes an occupation, usually self-employment versus wage/salary employment

t… Subscript indexes a point in time

ABBREVIATIONS

AuslG Germany’s Foreigners Act, German Abbreviation CEEC Central and Eastern European Countries

EEA European Economic Area

EU European Union

GewO Trade, Commerce and Industry Regulation Act, German Abbreviation

GSOEP German Socio-Economic Panel

GZR Central Register of Trade, Commerce and Industry, German Abbreviation

IfM Institute for Medium-Sized Business Research, German Abbreviation

ML Maximum Likelihood Estimation Method

NACE Classification of Economic Activities in the European Community

OLS Ordinary Least Square Method

ZfT Centre for Studies of Turkey in Essen, German

Abbreviation

L

T

CHAPTER TWO

Table 2.1: Distribution of Immigrants in Germany by Country of Origin in Percentage of the Total Foreign Population, 1997-2002 _______________________ 22 Table 2.2: Distribution of Immigrants by Federal States in Percentage of the Total

German Population, 1997-2002_________________________________ 23 Table 2.3: Distribution of Economically Active Immigrants by Occupational Status in

Percentage of the Immigrant Labour Force, 1987-2002 ______________ 27 Table 2.4: Self-Employment by Various Nationalities in Thousand and in Percentage,

1974-2002 _________________________________________________ 31 Table 2.5: Distribution of Immigrant versus German Founders by Number of

Employees Engaged in Percentage, 2002 _________________________ 36 CHAPTER THREE

Table 3.1: Selected Characteristics of Self-Employed and Salaried Immigrants in

Germany___________________________________________________ 59 Table 3.2: Estimation Results on the Propensity to Self-Employment: Immigrants in

Germany, 1984 (Logit Models) _________________________________ 65 Table 3.3: Estimation Results on the Propensity to Self-Employment: Immigrants in

Germany, 2000 (Logit Models) _________________________________ 66 CHAPTER FOUR

Table 4.1: Nationality of the First Fifteen Immigrant Founders in Upper Bavaria, 1990- 1994 ______________________________________________________ 83 Table 4.2: Survival Performance of Companies Established by European Immigrants in

Years, 1990-1994____________________________________________ 86 Table 4.3: Survival Performance of Immigrant and German Founders by Administrative

Districts in Years, 1990-1997 __________________________________ 88 Table 4.4: Composition of Data According to Industrial Sector, 1990-1994________ 90 Table 4.5: Survival Performance of Immigrant and German Founders by Industrial

Sectors in Years, 1990-1997 ___________________________________ 91 Table 4.6: Causes for Liquidation in Absolute Numbers and in Percentage of Total

Liquidations, 1990-1997 ______________________________________ 93

Table 4.7: Composition of Immigrant and German Founders at Enterprise Establishment by Various Age-Groups, 1990-1994 _____________________________ 95 Table 4.8: Impact of Human Capital on the Survival Performance of Immigrant

Entrepreneurs in Upper Bavaria _______________________________ 113 Table 4.9: Impact of Industry-Specific Human Capital on the Survival Performance of

Immigrant Entrepreneurs in Upper Bavaria_______________________ 118 Table 4.10: Main Characteristics of the Generated Clusters in Upper Bavaria _____ 121 Table 4.11: Impact of Share of Foreign Population on the Survival Performance of

Immigrant Entrepreneurs in Upper Bavaria_______________________ 125 Table 4.12: Impact of Nationality on the Survival Performance of Immigrant

Entrepreneurs in Upper Bavaria _______________________________ 128 CHAPTER SIX

Table 6.1: Distribution of the Employment Structure by Size-Classes in Percentage 166 Table 6.2: Distribution of the Established Immigrant Enterprises by Industrial Sector167 Table 6.3: Distribution of the Established Immigrant Enterprises by Nationality ___ 169 Table 6.4: Year of Enterprise Establishment and Age of Entrepreneur by Country of

Origin ____________________________________________________ 171 Table 6.5: Received Education in Germany by Country of Origin in Percentage ___ 172 Table 6.6: Vocational Education by Country of Origin in Percentage____________ 174 Table 6.7: Vocational Education by Industrial Sectors in Percentage ____________ 175 Table 6.8: Volume of Sales Structure in Percentage _________________________ 178 Table 6.9: Number of Employees by Country of Origin and Industrial Sector _____ 178 Table 6.10: Definition of Variables Selected _______________________________ 182 Table 6.11: OLS Estimation of the Regression Equation (6.1) _________________ 188 Table 6.12: OLS Estimation of the Regression Equations (6.2) and (6.3) _________ 192 Table 6.13: OLS Estimation of the Regression Equations (6.4) and (6.5) _________ 195

L

F

CHAPTER TWO

Figure 2.1: Resident Population in the Federal Republic of Germany by Nationality in Thousand Inhabitants, 1960-2002 _______________________________ 21 Figure 2.2: Distributions of Immigrant Labour Force, Dependent Employment, Self-

Employment and Unemployment in Thousand, 1960-2002 ___________ 25 Figure 2.3: Distribution of Immigrants’ Start-Ups by Nationality, 2002___________ 33 Figure 2.4: Distribution of Start-up Founders by Immigrants versus Germans Sector in

Percentage, 2002 ____________________________________________ 35 Figure 2.5: Distribution of Start-Ups by Immigrant’s versus German’s Funding

Structure in Percentage, 2002 __________________________________ 38 CHAPTER FOUR

Figure 4.1: Survival of Enterprises in Upper Bavaria, 1990-1997________________ 84 Figure 4.2: Survival of German and Immigrant Enterprises, 1990-1997___________ 85 Figure 4.3: Distribution of Immigrant and German Entrepreneurs at Enterprise

Establishment by Age ________________________________________ 94 Figure 4.4: Empirical Hazard Rate of Immigrant and German Enterprises, 1990-1997

_________________________________________________________ 103 Figure 4.5: Illustrations of the Gompertz-Makeham Model for Covariates Attached to

the Three Vectors___________________________________________ 106 Figure 4.6: Survival Performance of Enterprises by Various Founders’ Age Groups,

1990-1997 ________________________________________________ 109 Figure 4.7: Survival Performance of Immigrant and German Enterprises by Various

Age-Groups, 1990-1997 _____________________________________ 111 Figure 4.8: Survival Performance of Immigrant Enterprises by Age-Groups and

Industrial Sectors, 1990-1997 _________________________________ 114 Figure 4.9: Survival Performance of German Enterprises by Age-Groups and Industrial

Sectors, 1990-1997 _________________________________________ 115 Figure 4.10: Survival of Immigrant Enterprises by Foreign Population in the Region,

1990-1997 ________________________________________________ 120

Figure 4.11: Survival of Immigrant Enterprises in Cluster One by Share of Foreign Population ________________________________________________ 122 Figure 4.12: Survival of Immigrant Enterprises in Cluster Three by Share of Foreign

Population ________________________________________________ 123 Figure 4.13: Survival of Immigrant Enterprises in Cluster Four by Share of Foreign

Population ________________________________________________ 124 CHAPTER FIVE

Figure 5.1: The Dynamic Model of Entrepreneur’s Behaviour Change __________ 139 CHAPTER SIX

Figure 6.1: Average Years of Schooling Received in Germany and Language Skills 173 Figure 6.2: Volume of Sales Structure by Country of Origin in Thousand Euros ___ 176 Figure 6.3: Volume of Sales Structure by Industrial Sector in Thousand Euros ____ 177 Figure 6.4: Predominant Employment of Co-Nationals in Percentage of the Respective

Country of Origin___________________________________________ 179 Figure 6.5: Origin of Employees, Customers, and Suppliers ___________________ 181 CHAPTER SEVEN

Figure 7.1: Estimated Gompertz-Makeham Hazard Rate of Immigrant and German Enterprises in Upper Bavaria, 1990-1997 ________________________ 202

1. Introduction

1.1 Relevance of the subject immigrant entrepreneurship

By the end of the twentieth century, Europe had evolved into a great magnet for millions of immigrants displaced from their homelands by political and economic circumstances and at the same time attracted by sustainable economic development, liberal democracies and the social policies of the majority of Western European countries. With the recent growth of the new immigrant population in the emerging post-industrial urban economies, immigrant self-employment as an effective form of entrepreneurship is no longer simply a research subject relegated to strictly historical interest, nor is it the epitome of the American dream for immigrants and natives alike.

While business ownership and self-employment may be risky undertakings, they offer an intrinsic incentive by affording economic agents a sense of independence, higher self-esteem and life satisfaction. Entrepreneurship as such not only injects new dynamism into an economy, but it is also of great importance for the economic wealth and the future economic development of a particular country. It is also a significant element in combating unemployment and welfare drain through job creation, at the very least for the self-employed themselves.

Entrepreneurial activities serve further as a route of economic advancement and social mobility for most of the successful immigrant groups in their new host countries.

In addition to the varying human capital, the venturing behaviour of immigrants depends to a great extent on the characteristics of the labour market in the country of settlement as well as on the type of immigrant’s residence place (urban and rural). The effects, therefore, are likely to shift over time as immigrants feature new experiences and acquire new skills in the local market. Interdependencies between location and nationality specific factors such as division of responsibilities, religion, gender specific roles due to country of origin, might impact the entrepreneurial activities of immigrants.

In this sense, I completely disagree with the most migration and labour market models which tend to assume that immigrants are unskilled labour (O’Rourke and Williamson, 1999); in this way they underestimate the dynamic component of the human and social capital formation.

Although Germany was among the distinguished countries accepting immigrants (the so-called ‘guest workers’), self-employment activities in Germany are still very low

in comparison to the flourishing immigrant entrepreneurship in the United States (US) and other countries with a high proportion of immigrants. Recently, nascent immigrant enterprises show that a growing business culture exists in Germany, and this in turn has attracted the government’s attention to ensure its support. In this context, it is noteworthy that after a long period of decline the proportion of the labour force that is self-employed has increased since the middle of the 1970s in several Western countries, including Germany. As a result, on the one hand almost every twelfth entrepreneur in the Federal Republic of Germany is not a German citizen, and on the other hand every tenth immigrant ventures his or her own economic subsistence and establishes a business. Moreover, while during the last ten years the number of German enterprises increased by 14.5 per cent, the number of immigrant-owned ventures in Germany rose by 75.0 per cent, and the trends are still upwards (Leicht and Luber, 2002). As a consequence, the group of self-employed immigrants has gained importance both in an economic and a political sense, and the immigrant entrepreneurship has attracted the attention of many social science researchers due to the fact that Germany is facing the problem of increasing unemployment and economic stagnation at the same time. On the other hand, instruments are needed to obtain fiscal, social, informational and/or educational policy measures to improve the efficiency in the market of immigrant entrepreneurs. Market efficiency is improved whenever the number of successful start- ups increases and/or the number of unsuccessful start-ups decreases. The determinants of entrepreneurial start-ups and success by immigrants to Germany can serve as these instruments.

1.2 Objective of the thesis

Despite the cumulating literature on immigrant entrepreneurship and so-called ‘ethnic enclaves’¹ in general, there are only preliminary answers to questions such as why immigrants to Germany establish own businesses and engage in self-employment, and on the other hand, which are the driving factors leading to their economic success. One might argue that it is a combination of individual attributes, for instance human, social and cultural capital, and opportunity structure regarding the host country, which

1 The ethnic ‘niche’ or ‘enclave’ theory was first developed by Wilson and Portes (1980) in their study of the Cuban economy in Miami. According to this theory, the success of immigrant entrepreneurship lies in their very isolation from the market. This isolation protects them from the competition of native businesses, and provides good and service opportunities to new migrants who would not be able to integrate into the mainstream labour market. The current consensus seems to be that the enclave hypothesis is both redundant and misguided (Werbner, 2001).

facilitates or hinders the development of immigrant entrepreneurship (Li, 2001). In other words, due to restricted opportunities in the open market, some immigrants incline towards business venturing to take advantage of the immigrant enclave. I only partially agree with this view as it applies to situations where large immigrant concentrations have produced what many scholars have referred to as enclave economy. However, there exist various types of immigrant entrepreneurship and self-employment activities that need to be considered.

In the contrast, the conjecture of the neo-classical human capital theory implies that immigrants are a self-selected group of rational individuals who are willing to undertake risks pursuing the objectives of maximising their lifetime earnings and improving their lives. They are characterised by a strong incentive to invest in human capital and have the inner drive to succeed in the host country’s labour market. By virtue of their willingness to assume the risk of migration, both pecuniary and psychic, and undertake this new and often risky venture they become the first entrepreneurs². In other words, immigrants as risk takers are more dynamic and inherently more prone to incline towards self-employment compared with any other group. For instance, immigrants have higher self-employment rates than natives in North America (see Yuengert, 1995, for the US and Li, 2001, for Canada). Yuengert (1995) investigates the determinants of these differences and finds that immigrants from countries with larger self-employment sectors have higher self-employment rates. Migrants in the US cluster more in high-tax states, and encounter greater opportunities for tax deductions and avoidance as entrepreneurs than as salaried employees. His study is not supportive to the ethnicity enclave hypothesis.

In the field of economics, the prevailing framework is that of income choice (Lucas, 1978). More specifically, an immigrant chooses between self-employment and salaried work based on the monetary rewards of his particular choice. This thesis is supported by various empirical studies on immigrant assimilation. For instance, Borjas’s (1986) research on the self-employment experience of immigrants in the US shows that not only do self-employed immigrants have higher annual income than salaried workers, but they also have higher income than comparable self-employed native workers. This line of research is extended by Lofstrom (2002), who finds substantial differences between immigrant workers and self-employed migrants in

2 In this context, an entrepreneur is an individual who organises, operates, and assumes the risks of a business venture by definition.

earnings and educational attainment. He concludes that entrepreneurs have a better education and earn more than other working immigrants.

However, besides the drive for financial rewards, individuals might choose self- employment as a corrective measure to occupational mismatch or as an option for independence and psychological improvement of their self-worth. For immigrants, one might argue that impediments to well-paid jobs and to upward occupational mobility as well as unemployment and discrimination in the labour market impel them to undertake the self-employment opportunity. In this context, Clark and Drinkwater’s findings (1998) suggest that self-employment is an escape from discrimination in the paid- employment sector for immigrants in Great Britain. Britain’s non-whites suffer an earnings disadvantage in self-employment as well as that in paid-employment, which has been documented. Indeed the disadvantage, relative to whites, is greater in self- employment. Their analysis implies that this differential in earnings cannot be explained by differences in human capital endowment, but rather is the result of how these endowments are rewarded.

A dearth of both empirical and theoretical evidence is noted on immigrant entrepreneurship in Europe and especially in Germany. Germany is known to have a comparatively low rate of self-employment, but migrants exhibit an even lower rate despite the fact that self-employed immigrants reach earnings parity with self-employed natives, and earn a premium of 30 per cent over immigrant workers in the blue-collar category (Constant, 1998). Hence, it is unclear to me why in a country with a relatively high unemployment rate and rather institutionalised labour market entry, one does not observe more self-employment among immigrants. This situation, for instance, could be explained to a certain extent by the start-up specific human capital constraints faced by prospective immigrant entrepreneurs in Germany.

In this context, my first research objective is to highlight empirically the entrepreneurial behaviour of various immigrant groups in Germany. In particular, my target is to provide evidence to the question: which factors contribute to the observation that some immigrants have a higher propensity to engage in entrepreneurial activities than others do? In other words, which socio-economic characteristics accelerate the decision-making process with regard to immigrant self-employment?

Venturing a new enterprise and being successful as an entrepreneur in a new economic and social environment after a certain period of time are two congregational matters. Unfortunately, a large proportion of enterprises do not survive as identifiable

units beyond their first few years, and only a small proportion achieves significant growth. As the positive impact of the human and social capital investments on the venture’s performance has been repeatedly confirmed in the existing entrepreneurship literature in general, my second objective is to answer the question: do investments in human and social capital enhance the survival of enterprises established by immigrants?

Based on the findings that companies founded by immigrants compared to those of natives in Germany survive on average shorter (see my conference paper, Fertala, 2004), I develop a theoretical model explaining how fast immigrant entrepreneurs adjust their beliefs, which was so far not done. More precisely, issues such as to what degree do entrepreneurs rely on past experience when making decisions about their business ventures, and to what extent do they utilise new information about their venture's performance to learn about their true (but unknown) abilities and trading environment, I explore in theoretical context. Encouraged by the results of Baten (2001, b, c), I also contribute to data collection on companies established by six different immigrant groups in the city of Hamburg, and test the effect of the ‘similar-to-me’ hypothesis³ on the economic performance.

The answers of the above-stated questions imply an answer to the underlying composite questions: ‘What are the determinants of successful immigrant entrepreneurship in Germany?’ Overall, my research contributes to scant, both empirical and theoretical, evidence of immigrant entrepreneurship in the Federal Republic of Germany.

1.3 Positioning in the scientific field

As other behavioural disciplines such as sociology and social psychology are concerned with entrepreneurship as well, it would be naive not to include their fruitful scientific results in the analysis. I consider some of the common results, but at the same time, I do not wish to assert that I, as an economist, am in a position to address well the psychological approaches to entrepreneurship. Therefore, my thesis can be positioned as an economic one within the field of social sciences.

Within the field of economic research, my dissertation project can be seen as microeconomics as opposed to macroeconomics. The central unit is the individual

3 Byrne (1971) proposed the ‘similar-to-me’ hypothesis according to which, individuals rate other people more positively the more similar they are to themselves or the more similar the rating expert believes they are.

immigrant entrepreneur who is compared to other immigrant as well as native entrepreneurs. I do not study the fraction of immigrant entrepreneurs in a specific country and year, and compare it to fractions in other countries and years. However, indications of the macroeconomic environment are incorporated as explanatory factors for individual behaviour.

Regarding the area of microeconomics, the approach is rather labour market- oriented than business-oriented: I focus on the entrepreneur’s occupational choice and success rather than on the enterprise’s performance. Nevertheless, enterprise related variables are considered in my research as explanatory variables for immigrants’

entrepreneurial success.

Finally, someone who expects only case studies and qualitative discussions might be disappointed, as my thesis is oriented towards empirical analysis and favours to a great extent a rigorous implementation of the applied econometric techniques.

1.4 A definition of successful entrepreneurship and measurement issues

The problem of defining the word ‘entrepreneur’ and establishing the boundaries of the field entrepreneurship has not been solved yet (Bruyat and Julien, 2001). My first and most pressing task, therefore, is to define immigrant entrepreneurs and entrepreneurship for the purpose of my dissertation. Unfortunately, this happens to be one of the most challenging and intractable tasks faced by researchers working in the field. There is a proliferation of theories, definitions and taxonomies of entrepreneurship which often conflict and overlap, resulting in confusion and disagreement among researchers and practitioners about precisely what entrepreneurship is (Parker, 2002). For instance, consider the following illustrative and abbreviated viewpoint. In applied econometric work, labour economists often equate entrepreneurs with the self-employed, on the grounds that self-employment fulfils the entrepreneurial function of being risk-bearing residual claimants. However, others are of the opinion that this definition is too broad, claiming that only business owners who co-ordinate factors of production, in particular, those who employ workers, are really entrepreneurs. Conversely, others think the economist’s definition is too narrow, because it excludes entrepreneurship in the corporate and social spheres. Then there are those steeped in the Schumpeterian tradition who argue that entrepreneurship is characterised primarily by the introduction of new paradigm-shifting innovations. Others again have emphasised psychological traits and attitudes supposedly peculiar to entrepreneurship. When it comes to the

subject matter ‘immigrant entrepreneurship’, the task becomes even more complicated as additional dimensions are involved in the discussion. Are only individuals founding enterprises who were not born in the host country, in particular in Germany, immigrant entrepreneurs? And so the list of theories, definitions and taxonomies of entrepreneurship goes on.

1.4.1 Who is an immigrant entrepreneur?

Given the above-addressed problems along with the not yet established boundaries of the field entrepreneurship, within the course of my study, I define the immigrant entrepreneur as follows: (i) an entrepreneur is someone who indicates either that he has established a business venture or has acquired a (family) business alone or with a group of partners; or (ii) an entrepreneur is someone who indicates himself to be self- employed in an incorporated versus unincorporated business.⁴ Additionally, I operationalise the migration component within the entrepreneurship field either by country of origin, if available for the data applied in the empirical analysis, or by holding non-German citizenship in the common case. The selection of these definitions is motivated by their availability in German data, and on the other hand they allow for the possibility of a plausible comparison to other empirical micro-oriented studies of immigrant entrepreneurship.

I have readily to admit that the above-given as well as other definitions of an immigrant entrepreneurship are not perfect. In reality, the difference between an entrepreneur and non-entrepreneur does not clearly exist. There is rather a continuum of labour market positions stretching from ‘totally non-entrepreneurial’ to ‘heavily entrepreneurial’. Therefore, it is difficult to define a cut-off point on this continuum such that an immigrant is considered an entrepreneur to one side of the point and not to the other. The concept itself is not that uniformly and unidimensionally defined.

By utilising the above definitions, we circumvent the problem of having to decide whether an immigrant’s labour position is sufficiently entrepreneurial and label him as an ‘entrepreneur’. In representative surveys or case studies, respondents indicate themselves whether they are entrepreneurs or not. In this respect, the definitions are

4 De Wit (1993) uses a similar definition for self-employed persons and entrepreneurs alike, whose appropriateness he motivates in detail (pp. 2-3). Additionally, as the empirical analysis in the chapter three is based on the German Socio-Economic Panel (GSOEP), I focus on its definition that in turn does not differ from that of the German Federal Statistic Office, which reads: self-employed individuals are individuals that earn no wage or salary, but derive their income by exercising their profession or business on their own account and/or for their own risk.

subjective ones as well. The possibility is acknowledged that two individuals might have identical labour market positions, but one turns out to be an entrepreneur and the other does not.

Finally, to cut through a paralysing and ultimately fruitless debate, and to achieve consistency, I adopt the following convention in my dissertation. At the conceptual level, the terms ‘immigrant entrepreneur’ and ‘immigrant entrepreneurship’

will be used; at the empirical level, where issues of measurement and estimation are involved, I use the closest approximation to the manifestation of immigrant entrepreneurship that appears to be suitable, as I have already defined above.

1.4.2 How should we measure entrepreneurial success?

Determinants of and, as a result, appropriately derived measures of entrepreneurial success, regardless of the definition of success, can be found in the history of the entrepreneurship thoughts, the most relevant of which I will briefly overview in the following subchapter.

Say states that success in entrepreneurship requires qualities such as ‘judgement, perseverance and a knowledge of the world as well as of business’ (Say, 1971). In addition, success requires knowledge of the industry and the occupation gathered through experience. But an entrepreneur may also fail ‘without any fault of his own’, while this chance of failure depends on good luck and general business conditions.

Marshall’s (1930) successful entrepreneur has command over general and specialised abilities, and also over capital and good fortune. According to his view, general ability is essential to attain success in any pursuit. It depends on family background, education and talent. Specialised ability involves vast knowledge of a specific trade as well as leadership qualities. Additionally, an entrepreneur who possesses own capital surely has an advantage when establishing and running a business. Finally, good fortune is also important for the Marshallian entrepreneur.

The function of Schumpeter’s entrepreneur (1934) is to innovate and firms which cease to innovate will not survive for a long period of time. Successful innovation requires leadership, and on the other hand success in entrepreneurship demands strong and scarce motivations to innovate prior to engagement in an entrepreneurial endeavour.

Success as a Knightian entrepreneur requires ‘the power of effective control’

(1921), and it calls, furthermore, for self-confidence and the disposition to act on one’s

own opinion. An entrepreneur should be venturesome and have foresight. The demand for ability to forecast varies with industrial sectors depending on the time length of the production process and on the variability of consumer wants the product satisfied; the more basic the wants, the more stable and predictable they are. A successful entrepreneur should also have superior managerial ability, and belief in his own good luck.

Considering the debate on determinants of successful entrepreneurship from the historical point of view, I derive various measures of success, which are utilised in my dissertation. First, the longer an immigrant entrepreneur survives as such, the more successful he is. More precisely, the time span of survival before exiting the entrepreneurial state voluntarily or involuntarily characterises the business success of an immigrant entrepreneur.⁵ Second, I use the extent to which immigrant entrepreneurs utilise new information about their venture's performance to learn about their true (but unknown) abilities and trading environment. In other words, the faster the process of incorporating new information than relying on past experience, the more successful the entrepreneur is. Third and last in the analysis, I employ the nominal volume of sales per employee as operational measure, which takes into account the personnel an entrepreneur has to control, and thus, indicates his efficiency.

1.5 The structure of the thesis

The remainder of my dissertation can be split into three major parts, which are organised as follows.

Chapter two discusses the basic legal conditions for the immigrants’ labour participation, in particular, the legal precondition for establishing an enterprise and being self-employed as an immigrant to Germany. Additionally, I analyse the labour market integration and the development trends in a long-term perspective. The idea is to provide the reader with an understanding of the opportunities existing in the host country, and on the other hand to highlight the activities of immigrants from a labour economic standpoint.

Chapter three develops an empirical discrete-choice model to find the determinants, which influence the propensity of immigrants in Germany to engage in self-employment or to remain a salaried employee. An individual is defined to be

5 A voluntary exit does not necessarily mean a lack of entrepreneurial success.

willing to incline towards self-employment if the valuation of being self-employed versus remaining in wage/salary employment (or any unemployed), for otherwise identical situations, is positive. In other words, one is willing to start whenever entrepreneurship is seen as the best available career option. Consequently, the willingness depends on both individual preferences for the special features of self- employment as well as on the available outside options. Therefore, categories of observed variables, which potentially impact this decision-making process, are psychological, human capital and situational variables.

Chapters four, five and six investigate the success of immigrant entrepreneurs in Germany measured by the indications outlined in the previous subchapter. More precisely, Chapter four quantifies individual-specific determinants of entrepreneurship duration. I estimate a parametric hazard model to predict the survival chance of an immigrant establishing an own business. In Chapter five I propose a theoretical joint model of entrepreneurial adjustment of beliefs, effort, and performance, which links all of these phenomena together in a unified way. Additionally, I provide an econometric formulation of the model that enables to estimate the extent to which entrepreneurs exploit new information when adjusting their expectations, and in this sense, to derive conclusion about their success as entrepreneurs. Thereafter, Chapter six explores the process of working team composition within a specific company, and test the effect of the ‘similar-to-me’ hypothesis on the immigrants’ entrepreneurial performance measured by volume of sales per employee.

Finally, Chapter seven summarises the main findings and conclusions of the preceding chapters, and draws together some suggestions for future research where our understanding of particular issues is especially incomplete.

2. Immigration to Germany and Labour Market

2.1 Extended abstract

Do immigration policy, labour market structure and legal regulations influence immigrants’ employment behaviour, and in particular, their self-employment activities?

My main aim in this chapter is to outline briefly the migration policy pursued by the German government over the last 50 years, and to illustrate how it impacted the demographic and labour market dynamics, which I see as a major necessity for the further understanding of the phenomenon immigrant entrepreneurship. My main results confirm that institutional characteristics of the host country do impact the labour market behaviour of immigrants to Germany. Most noteworthily, immigrants from EU countries of origin account for much higher self-employment rates, while those from non-EU countries prefer being employees due to additional formal obstacles associated with the enterprise establishing procedure.

2.2 Introduction

By the end of the millennium, the immigrant population in Germany has risen to more than ten per cent, making Germany a de facto immigration country. The recruitment ban, and on the other hand, the residence authorisation regulations for immigrants in Germany led to a minimisation of the inter-country fluctuations and an increasing tendency towards permanent settlement among the foreign population. Additionally, the introduction of a general legal framework for family reunification resulted in an enormous change to the political and economic dedication of immigrants to Germany.

They started, for instance, establishing own businesses and inclining towards entrepreneurial activities. The self-employment structure of immigrants in Germany has changed since the 1970s.⁶ Over the last decade, the absolute number of self-employed foreigners developed more dynamically than the number of self-employed Germans.

The stock of self-employed foreigners increased by 23.6 per cent between 1992 and 2001, while the rise in self-employment was 17.0 per cent (Täubner, 2003). Overall, I believe that the idiosyncrasies of the immigration and the naturalisation laws in Germany have shaped considerably both the quantity (flow and stock) and quality

6 In the early 1970s only 40,000 immigrants were registered as self-employed, and their businesses were tied to restaurants or to catering to the needs of their compatriots (Constant and Shachmurove, 2003).

(human capital endowment) of the immigrants to Germany, and thus, their labour market activities.

2.3 Managing migration in Germany: historical background

In the nineteenth century, Germany was primarily a country of net emigration and it remained until the 1950s the major source of immigrants to the United States (Martin, 1997). More precisely, out of the 66 million immigrants who arrived in the US between 1820 and 2000, over seven million were from Germany, followed by six million from Mexico and five million from Italy. Since the late 1950s, Germany has experienced massive migration comparable to the level of the First American Great Migration of the early 1900s, and has become one of the most important destinations for migrants from all over the world. In this sense, it has been similar to other industrialised countries such as the US, France and the United Kingdom, but strangely, on the contrary the entrepreneurial activities of immigrants have stayed behind those in the countries indicated above.

The post-World War II immigration history of Germany is characterised by the nature of its parallel flows: ethnic Germans returning from abroad, and foreigners with non-German ancestry, the so-called ‘guest workers’.⁷ In this subchapter, I highlight the essential developments in the guest worker recruitment policy as a significant determinant of the recent trends in the immigrant entrepreneurship in Germany. In addition, I discuss briefly the migration situation of ethnic Germans after the fall of the iron curtain in the 1990s, the asylum policy of the German government, and I conclude with the new guest workers’ programmes and the introduction of green cards.

2.3.1 From emigration to guest workers’ recruitment

The second half of the 1950s was characterised by the fact that the number of vacant positions exceeded those of registered unemployed, and the employers requested permission to recruit foreign workers. Hermann (1992), for instance, concluded that there was ‘no noteworthy discussion’ of alternatives to employing guest workers, and social science analysts cite four reasons why recruiting guest workers seemed to be the right decision. Firstly, the German labour force was shrinking for demographic and

7 The word ‘guest worker’ is the literal translation of the German word ‘Gastarbeiter’ and reflects the notion that those immigrants were invited to work in Germany, yet they were not expected to become permanent residents.

related reasons in the early 1960s, including a delayed ‘baby boom’, the greater availability of educational opportunities that kept more adolescents in the school system as well as better pensions that prompted earlier retirements. For family political reasons, alternatives to attracting guest workers, such as encouraging more women to seek jobs, were not pursued. Secondly, there was a reluctance to risk what was perceived to be a fragile economic recovery on risky mechanisation and rationalisation substitutes to foreign employees (Kindleberger, 1967). Trade unions did not contest importing foreign labour in that period of full employment after securing a promise that foreigners would be treated equally, and thus would not underbid German employees. Thirdly, Europe was unifying in any case, and Germany had agreed that Italians and other European Community (EC) nationals would have autonomy of movement rights⁸ after 1 January 1968 (Böhning, 1972). With Italians soon able to come as they wished to, Germany considered it was simply regulating unilaterally the rate at which EC employees would arrive soon by any means. Fourthly, the early 1960s provided Western Europe with a peculiar economic environment that lasted longer than assumed. Germany and other European nations in the 1960s had undervalued their currencies in a world of fixed exchange rates, so that domestic and foreign capital was invested to manufacture commodities for export markets. The incentive to invest and create employment in Germany was significantly high. Consequently, American multinationals poured enormous capital into Europe, and on the contrary Germany had little encouragement to invest and provide jobs abroad.

However, guest worker recruitment expanded faster and grew larger than anticipated. After the Berlin Wall closed the door from East to West Germany in 1961, bilateral recruitment agreements were signed with seven non-EC countries: Greece, Morocco, Portugal, Spain, Tunisia, Turkey, and Yugoslavia.⁹ The core of those agreements included the enrolment of guest workers almost exclusively in the industrial sector, for vacancies with few qualification requirements. Hence, that policy pursued a dual rationale: preventing settlement on the one hand, and exposing the largest possible number of immigrant workers to the industrial sector on the other hand.

8 Autonomy of movement in the area of the EC means that an employee from any member state may enter another, remain for up to three months in search of a vacancy, and then, if the migrant finds employment, the host country has to grant any necessary work and residence permit.

9 Greece became a member of the EC in 1981, and Spain and Portugal became members in 1986. Greece had to wait until 1988 before its citizens got full freedom of movement rights, and Spain and Portugal, scheduled to have freedom of movement rights, in 1993, got mobility rights one year early in 1992.

In 1960, there were 686,000 foreigners, which comprised for 1.2 per cent of the total German population. At that point of time, the most important country of origin was Italy. The number of guest workers reached one million in 1964, and increased to a peak of 2.6 million in 1973, when about 12 per cent of the German wage and salary labour force was foreign employees. Most guest workers were ex-farmers between 18 and 35, although a large number of semi-skilled construction workers, miners, and schoolteachers migrated to Germany to work on assembly lines.¹⁰ News of jobs which paid in one month a year’s earnings at home, spread rapidly, and there were soon long lists of Turks and Yugoslavs signed up waiting for the chance to go abroad. As a result, by 1973 the most important country of origin was no longer Italy, but rather Turkey, which accounted for 23 per cent of all foreigners in Germany. Other countries of origin included Yugoslavia (17 per cent), Italy (16 per cent), Greece (ten per cent), and Spain (seven per cent).

The demand for immigrant labour declined in 1973, when Germany entered a period of economic recession, partially due to the world oil shock. Accordingly, the German government declared a recruitment ban for foreign workers, and it started to wrestle with the concern of how to administrate the still increasing number of immigrants in the country as two myths discouraged its planning for settlement and integration. First, Germany’s so-called ‘rotation principle’ held that after completing one year of employment, and perhaps another two years for exceptionally efficient workers, the immigrant would return to his country of origin and invest his savings into developing his own country. Second, a fresh recruit would replace the immigrant who left the host county. The myth of return arose from immigrants who proclaimed that they wanted to return to their families and communities, to familiar languages and cultures. Most immigrants did in fact return: between 1960 and 1999, 70 per cent of the 30 million foreigners who stayed in Germany more than 90 days left, but a large proportion of earlier guest workers had already acquired residence permits for a longer or permanent duration, attesting to the limits of the rotation principle. Thus, many immigrants started obviously planning a longer or even permanent residence in

10 While workers recruited from Turkey, Italy, Greece, Spain and Portugal tended not to possess high skill levels, a relatively large share of those recruited from Yugoslavia were skilled workers. For instance, a representative survey of immigrant employees conducted in 1972 found that 55 per cent of Yugoslav men employed in industry were skilled workers or salaried employees, whereas the corresponding figures for the other groups were much lower: 16 per cent for Turkish, 23 per cent for Italian, and 8 per cent for Greek men. For women the figures were: 14 per cent for Yugoslavs and zero per cent for the other three groups (Koenig, Schulze and Wessel, 1986, Table 55/I, p. 85).